Automated trading systems have been used for many years to trade a wide range of products including to financial products including commodities such as precious metals and various financial instruments including equities and foreign exchange (FX) products such as FX spot. Within the FX spot market, there are two major types of system: direct dealing systems where deals are concluded by exchange of conversation electronically between traders; and anonymous systems in which traders submit quotes into a system anonymously and quotes are matched, subject to parameters such as credit limits. The identity of parties to a deal are only given up to the traders when the deal is completed.
Anonymous systems are one example of matching systems in which quotes submitted by parties are matched to make a deal. Typically, visible bids and offers are entered into the system which are matched by invisible hits or takes from traders. The success of any such system is dependent on the liquidity of the fungible that is being traded. Liquidity is directly dependent on the number of quotes in the system. Liquidity is crucial to the success of a trading system as if affects the ability of parties to trade and the price at which they can trade. In the FX spot market, the majority of liquidity in various currency pairs is concentrated in a single system. The effect is one of positive feedback; once a degree of liquidity is established traders know that they can execute deals at the best prices on that system and therefore place orders on that system so further increasing the liquidity in the system.
In the interbank FX spot market the majority of anonymous deals are done either on the Reuters Dealing 3000 Spot Matching system provided by Reuters plc of London UK or on the EBS Spot Matching system provided by EBS Group Limited of London UK. The market in particular currency pairs is concentrated on one or other of these systems depending upon which has the majority of the liquidity in the currency pair.
An enhancement to the EBS system, available to the market as EBS Prime, is described in WO 2004/40422, which is a counterpart of U.S. application Ser. No. 10/694,758, the contents of each of which are incorporated herein by reference in their entirety. This document discloses the use of prime brokers to give access to smaller financial institutions who would not otherwise be able to trade on the EBS system, or would only have access to limited prices as many parties trading on the system would not extend them credit. Smaller banks can trade via a prime broker bank and the counterparty to any prime broker trade is unaware that they have traded with anyone other than the prime broker bank. The prime broker bank and the customer bank will conclude a deal for the same amount but at a price which may favor the prime broker bank. The use of prime brokerage is advantageous to the customer bank as it gives them access to a pool of liquidity to which they would not otherwise have access; it is advantageous to the prime broker banks as it enables them to profit from third parties using their credit; and it is advantageous to the system operator and to all parties trading on the system as it increases the number of quotes in the system, and, therefore the liquidity in the instruments being traded.
Another approach that has been taken to increase liquidity is to make different liquidity pools available to customers through a single interface. This does not increase the liquidity of any particular system but gives the customer access to a number of different systems simultaneously, so increasing their chances of seeing the best available prices in the market. An example of this type of system is offered by FX Alliance LLC under the trade mark FXAII Quotes which displays to customers a blended rate taken from a number of liquidity providers. This system is a portal which aggregates prices from various institutions and presents the best prices to the user. Another example is provided by Lava Trading Inc under the trade mark Lava Colorbook® and disclosed in U.S. Pat. No. 6,278,982. Other portal type systems are provided by Currenex Inc under the Trade mark FX Trades and State Street Corporation of Boston Ma under the trade mark FX Connect®.
We have appreciated that there is a need to increase further the liquidity of automated trading systems such as anonymous matching systems. However, the approach taken by portal systems is not suitable and will not enhance the prices that are available to customers already on the anonymous matching system. The portal approach would integrate a bank's streaming prices directly into the anonymous matching system. However, the banks that would provide such price streams already trade on the matching system and the net effect would not be advantageous to the bank as there no additional benefit to the bank.